Could A Perfect Storm For Long Shareholders Be Brewing?
As I suspected and mentioned in my last comprehensive Seeking Alpha blog on Kandi Technologies, Inc. last week, the Company did hit a Grand Slam by landing an additional initial order for their new larger full speed electric car, the KD5010XXYEV, with the China Postal Service in Hangzhou, the Capital of Zhejiang Province China. IMO, there are several reasons this is a grand slam for KNDI. First, Hangzhou is one of the initial five cities announce by the PRC Government on June 1, eligible for the full, up to a 60,000 RMB ($8,600 US), National subsidy for individual consumers. (I can’t think of a better way to gain immediate credibility in building a “Brand Name” for future consumer sales then by having the Postal Service use one of KNDI’s electric vehicles). Secondly, the door is now open for any myriad of government vehicle uses from “meter maids” to “meter readers” and any other urban use that requires operation on busy streets and a tight parking space. But most importantly, this is now the second city, with Jinhua being the first, that has now ordered KNDI’s Electric Vehicles (NYSE:EV), which should now confirm that KNDI can develop, build and deliver a commercial vehicle with its new EV technology enabling them to carve out a significant chunk of China’s potential multi-million Government vehicle Market.
An interesting factor in this sale is the price that KNDI has received from the Government. Several months ago when KNDI announced their first test vehicle sales to Jinhua, they reported receiving $7,600 US per vehicle. This new sale works out to just over $10,000 US per vehicle. I have learned from the Company that these Government sales are made “direct” from the Company with no distributor in the middle. If one were to look at the Company’s last 10Q they would notice that the wholesale price they received for their US Coco EV sales was approximately $4,500 per vehicle which left a 25% gross profit for the Company. While this new China vehicle would most likely cost more to manufacture since it is slightly larger and has a larger motor, with no trans-Pacific shipping costs to be incurred, I would think the gross profit on the new Postal car would be considerably higher than the US car.
A comment on the less than enthusiastic trading of the stock in the face of such “Company Making” news.
KNDI, like most US listed China stocks such as CAAS, WATG, CYD, APWR and TSL, has a very large reported short position. In the past, before electronic black box trading and triple short Exchange Traded Funds, (ETF’s), such a short position would have been cause for concern. But like these others, KNDI is included in the Halter Index of China stocks so in turn it is also included in several ETF’s, which could account for a good bit of the shorting in KNDI due to “flash shorting” and hedging. A combination of this activity along with what appears to be a large “selective” short which began in earnest last January as the stock was making new highs and the Company announced a funding is, IMO, the main cause of the current large short. At present, the short reported at 987,458 is now almost 12% of the float.
But, unlike most other US “China traders”, KNDI’s volume has dramatically decreased some 80% over the past six months while the short has consistently grown. The decrease in volume is not surprising since most of the float is now in solid long term hands created by the continuing impressive company performance reported to date. As per the most recent reported short position, KNDI now has a reported short approaching Nine days average volume to cover. This portends a perilous situation for a short seller and most likely exciting times ahead for long shareholders.
Based on my background as a former OTC Market Maker, the lethargic to negative action each time the Company puts out a strong PR is not surprising in that it is imperative for a short seller to immediately quash enthusiasm for a stock he has shorted heavily no matter how strong the PR. The last thing a short can afford to allow is to let the stock start charging upward. He knows this could bring in momentum traders who in turn could bury him with buy orders. IMO, the “selective” short seller in KNDI has boxed himself in with no easy way out. If he stops shorting, the stock will start rising, if he tries to cover it will rise even faster as “offers” disappear since he has been the main supplier of stock.
Since the Company’s fundamentals are now starting to “kick in” in a big way, IMO, it is only a short (no pun intended) matter of time before some long Funds begin to realize how undervalued KNDI really is with its current $65 million market cap less then replacement cost of its facilities alone, and become buyers in size of the stock. Galloping fundamentals aside, another reason I believe this upward move could happen shortly is a noteworthy change that is appearing in listed stocks on the Shanghai Stock Exchange. As of Monday’s close, the SSE has now gone up five of the last six trading sessions gaining some 6%. This type of action hasn't occurred on that exchange in over six months. While there is no direct correlation between NASDAQ’s KNDI and the SSE, most strong upward moves in the US China Stocks usually are preceded by a stronger SSE market. IMO, the main cause of this phenomenon is the electronic Flash Trading by the ETF’s reversing from short flash trades to long and hedges unwound. This can become a very serious problem for the “selective” short seller in that the “computer” putting in the Flash buying is not driven either by emotion or price. If the computer puts in buy orders they will trade at the “offer” side of the market, whatever price that happens to be.
Under any circumstance, KNDI is here to stay which should prove to be a real problem for anyone who is on the wrong side of this stock.
Disclosure: Long KNDI